Costco Earnings Preview

Where do you go if you want a trio pack of Plaza De Caviar? Three types of sturgeon for the bargain price of $199.99 is sitting at Costco COST waiting for you along with 12 pounds of Anna’s All-Natural Honey for $54.99. (Two words: college prank)

Maybe you think there’s something a little too middle-class about getting your caviar at Costco but buying its stock in bulk could be the best bargain the company has to offer.

On Thursday morning, the company will report fiscal Q3 2013 earnings with a conference call set for 11:00 a.m. EST.

Expectations

Analysts expect the company to report EPS of $1.03. Revenue is expected to come in at $24.23 billion.

The company has beat estimates four quarters in a row.

The Bull Case

Costco has a lot going for it. While so many retailers are using the unseasonably long winter as an excuse for soft earnings (Walmart WMT and Target TGT to name a two), Costco’s product offerings make it largely immune to those effects. If you need 96 rolls of toilet paper, a little bit of late season snow isn’t going to stop you, right?

The company’s press release said that it grew steadily through February, March, and April as comp. store sales rose 4-6 percent.

The company has worked to strengthen its online presence for customers who aren’t within driving distance that would allow them to shop at the club regularly.

Costco’s strategy of constantly stocking new products has worked to its advantage in two ways. First, it keeps the store fresh and that has caused the membership renewal rate to grow to 89.7 percent. Second, by negotiating with suppliers for products that are overstocked, Costco gains a competitive advantage. Just like the bargain bin at an outlet store, when you purchase what somebody wants to get rid of, you can score a great deal.

The Bear Case

Gas prices. Roughly 20 percent of Costco’s business is in its gas stations. When gas prices fall, the company takes a hit on revenue. With gas prices low over the past quarter, this will likely weigh on that part of its business but not enough to cause a widespread negative hit to over revenue.

Technical Analysis

Costco’s chart is the picture of health. It formed an ascending channel at the beginning of the year and has seen a series of gains along with healthy profit taking that propelled it higher. It’s above all major moving averages and, like the overall market of late, has taken a pause—another healthy sign.

Unless you play this stock in the afterhours market you won’t be able to take part in an earnings trade but since the stock is well above its 50 day moving average, that’s a good thing. There is good reason to think that investors may use earnings as an excuse to take profits. Watch for an entry point to set up post-earnings.

Disclosure: At the time of this writing, Tim Parker had no position in any of the equities mentioned and can think of at least 13 good practical jokes that could only be made better with the addition of 12 pounds of honey.